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Chile Peso Posts Biggest Latin American Drop on Vergara Outlook

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April 22 (Bloomberg) -- Chile’s peso posted the biggest decline in Latin America after central bank President Rodrigo Vergara said policy makers will probably reduce borrowing costs further, making the currency less attractive.

The currency slid 0.6 percent to 561.14 per U.S. dollar at 11:14 a.m. in Santiago, the largest drop among major regional currencies tracked by Bloomberg. The two-year swap rate fell four basis points, or 0.04 percentage point, to 3.76 percent.

“The local market was short dollars, betting on a return to 545, when offshore investors started buying,” said Eugenio Cortes, the head of foreign-exchange forwards at EuroAmerica Corredores de Bolsa SA in Santiago. “Vergara’s declarations aren’t new. He maintained the dovish bias, but interest-rate expectations fell.”

Chile’s growth rate is trailing its potential as investment weakens, Vergara said today at an event in Santiago. Further borrowing-cost reductions are likely after an “important slowdown” in the economy, Vergara said. The central bank maintained its target lending rate at 4 percent this month after back-to-back cuts of 25 basis points.

Itau Unibanco Holding SA predicts that Chile will resume rate cuts in May and stop lowering them at 3.5 percent, according to a research note to clients. Nomura Holdings Inc. recommended that investors increase bets that the Colombian peso will outperform Chile’s currency, which is trading at the weakest level versus its Andean peer since 2009.

Chile’s economic activity expanded 1.6 percent in January, the slowest pace in four years, before picking up to 2.9 percent in February.

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Richard Richtmyer, Dennis Fitzgerald